Tuesday, 10 November 2009

1930s Vs Today: Lots To Worry About

I have written an article about the similarities between now and the great depression, which I will post at a later date. However, for now, I just noticed another interesting parallel.

One of the reasons the GD was so bad was that, while the natural course of events should have caused price deflation, and this happened in spades in monetary terms, the authorities did all they could to prevent prices falling. While the fall in the money supply was not itself the problem (it simply was the necessary consequence of the credit boom and was in no way a cause of the crisis), the way the authorities tried to prevent prices themselves falling in spite of a lower money supply, was the source of much of the unnecessary damage.

By artificially propping up wages, commodity prices, and consumer prices, the government failed to let markets clear (particularly the labour market), prevented the reorganisation of labour and capital, and retarded the rise in the savings rate. Today, we have a similar situation. I’m not talking about the minimum wage. I’m talking about the policies to kill the dollar and encourage the dollar carry trade. By artificially elevating commodity prices, this is squeezing disposable income and reducing the ability of consumers and businesses to save. What’s more, the uncertainty over the outlook for prices (there is a range of possibilities from crushing deflation to hyperinflation) is no doubt hindering investment decisions as did the interventionist policies of the 1930s.

The fundamentals of the US economy continue to deteriorate, positive real GDP growth or no.